Markets were slightly lower last week as concerns over an increase in the capital gains tax was partially offset by jobless claims falling to a pandemic low. Bloomberg reported President Biden is considering almost doubling the capital gains tax on the wealthiest Americans. Under the president’s plan, the current 20% capital gains tax would be increased to 39.6%. The Dow Jones Industrial Average dropped 321 points on Thursday but regained 227 points on Friday when new jobless claim filings dropped to 547,000, a new pandemic low.

First quarter earnings results continue to please investors. Of the 125 companies in the S&P 500 that have reported results so far, 105 (84%) have beaten estimates according to FactSet. That’s the highest growth rate since the third quarter of 2010.

I’ve had several conversations with clients and friends lately about the size of the deficit and the fear of inflation. To put things in perspective, I’ve included a chart from the Bureau of Economic Research showing the growth of the money supply. M2 is a measure of the money supply that includes cash, checking deposits and easily convertible near money. It’s a broader measure of cash in circulation in the U.S. economy.

The sharp spike in M2 at the far right-hand side of the chart is what many economists cite as their main concern that inflation will come roaring back. They know two previous spikes in M2 resulted in inflation and threatened growth in the economy. The reason for the spike is the recent stimulus checks sent to taxpayers courtesy of the U.S. Treasury. It is estimated that 40% of that money was deposited into savings and/or checking accounts.

Other economists believe that as the U.S. continues to open up, much of that money will be spent and put back into circulation. As far as the deficit is concerned, the Fed has said several times over the last few months that they don’t believe the deficit will cause serious concern for the U.S. economy for several years. Most analysts believe in 3-4 years, we will need to start addressing the size of the deficit and work on getting it reduced.

If you have any questions, please contact me.

• A key measure of the perceived risk in low-rated corporate bonds is hovering around its lowest level in more than a decade. The lower this measure goes, the more confident investors are in the strength of the U.S. economy.
• My how times have changed. According to Freddie Mac, the average 30-year fixed rate mortgage in 1981 (forty years ago) was 18.63%. That was the highest rate recorded in U.S. history. My first mortgage was in 1980. I remember how terribly high interest rates were then. Today, a 30-year fixed rate mortgage is slightly under 3%.
• Hiring increased in 49 states across the country in March with the largest states, California, Texas and New York adding the most jobs, according to the Labor Department. Businesses that added the most jobs were restaurants, hotels, leisure and other entertainment venues.
• In 2020, personal bankruptcies in the U.S. totaled 522,808, down 66% from the 1,536,799 personal bankruptcies filed in 2010.
• Swiss investment banker, Credit Suisse, reported a $4.7 billion loss in the first quarter due to its exposure to Archegos Capital Management. Credit Suisse had a $20 billion exposure to the money manager but managed to salvage almost three-fourths of the investment. Archegos significantly overleveraged their investment in a handful of stocks by use of derivatives; the easily misunderstood and misused financial tools that played a part in the 2008-2009 credit crisis. Credit Suisse is looking for a $2 billion capital injection as regulators look into Archegos.
• Computer chips are the heart of everything from autos to televisions. A drastic chip shortage has forced auto manufacturers to shutter factories and electronic component manufacturers to stretch out estimated delivery times. Last week, Intel Corp.’s new chief executive said the global chip shortage could stretch two more years before production is adequate.
• A federal vaccine advisory committee recommended the use of Johnson & Johnson’s Covid-19 vaccine in the U.S. According to the committee’s Dr. Katherine Poehling, “The benefits clearly outweigh the risks, though there are differences in age groups and particularly for women less than 50 years of age.”

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